Econ 133 – Global Inequality and Growth

Trends in inequality between countries

Gabriel Zucman [email protected]

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Roadmap

1. The dynamics of between-country inequality since 1980

2. A very long run perspective

3. The future of inequality between countries

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1 Between-country inequality since 1980

1.1 Basic orders of magnitude for today

Average per adult monthly income, globally = $1,740 (in PPP, ie adjusted for differences in prices: see next lecture) • North America: $5,490 (3 × global average) • EU: $3,420 (2 × global average) • China: $1,520 (90% of global average) • India: $750 (45% of global average) • Sub-Saharan Africa: $560 (30% of global average = 1/10 of North America)

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1.2 Changes in shares of global income

Today:

• China = 19% of global income • North America = 17% • EU = 17%

In 1980:

• China = 3% of global income • North America = 20% • EU = 28%

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1.3 Explaining convergence

• Openness: diffusion of technology, know-how, trade (specialization)

• Limited evidence for role of foreign capital flows – Helps convergence in output but not income – Most growth success stories rely on dom. rather than foreign inv

• Domestic investment: education, health, etc. (strong correlation between /GDP ratio and income per capita)

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2 Between-country inequality in the long run

Two phases in between-country income inequality 1700-2015:

• Divergence between Western and other countries during 19th century & until mid-20th century

• Convergence since 1980s

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Global inequality 1700-2012: divergence then convergence? 250%

225%

200%

175% Europe-America World 150% Asia-Africa 125%

100%

75% Per capita GDP (% of world(%of average) Percapita GDP

50%

25%

0% 1700 1820 1870 1913 1950 1970 1990 2012 Per capita GDP in Asia-Africa went from 37% of world average in 1950 to 61% in 2012. Sources and series: Piketty (2014) see piketty.pse.ens.fr/capital21c. - 12 - Econ 133 - Global Inequality and Growth Gabriel Zucman

2.1 Data sources on long-run population and output

Maddison project database: http://www.ggdc.net/maddison/

Recent decades: World Bank World Development Indicators: http://data.worldbank.org

Population projections: United Nations Prospects: esa.un.org/wpp

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2.2 Explaining divergence

Huge literature on long-run developments and why some countries are richer than others?

• Smith: market institutions, property rights

• Marx: primitive accumulation

• Weber: protestant ethics

Here emphasize some recent important work

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1. Armed trade and colonial domination → allow West to escape ecological constraint (Pomeranz, 2000)

• 1750-1800 Western Europe & China at similar levels of development • But massive deforestation in 18th century: from 1500 to 1800, share of forested land goes from 30-40% to 5-10% in Europe • Trade and colonial domination → escape from Malthusian trap • Key role of colonization of America & armed trade → how Europe prevails in Asian trade over China

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2. European domination over global textile manuf (Beckert, 2004).

• Cotton = key 19th century commodity, the Industrial Revolution’s “launching pad”

• European domination over textile: violence at every stage

• West appropriates land in America, sends slaves from Africa to produce raw cotton, bans Indian textiles → 1750-1850: Europe controls global textile manufacturing • Key role of slavery: huge acceleration of slave trade 1780–1860 • Only after abolition of slavery in US does Indian cotton rise again

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3. Size of political communities & conflict

• Europe: smaller polities → more competition between small states, military (and financial) innovation

• China: larger polity, less military innovation during 17c-19c

• See, e.g., Rosenthal and Wong (2011)

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3 The future of between country inequality

• Today, Europe + North America = about 50% of world GDP (as in 1860)

• At some point during 21th century: down to 20-30% (= share of Europe + America in world population = convergence)

• When exactly? Nobody knows. Convergence ≈ 2040 in East Asia, and ≈ 2090 in South Asia and Africa?

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3.1 The future of global growth

Conceptual framework: The standard growth model

• Y = F (K,L) with constant returns to scale • e.g., Cobb-Douglas: Y = KαL1−α • Steady-state growth path = everything grows at rate g: gt gt gt Yt = Y0e , Kt = K0e and Lt = L0e • Growth of Lt = Nt × Pt can be decomposed into growth of nt ht employed population Nt = N0e and of productivity Pt = P0e • i.e., g = n + h = + productivity growth • n comes from fertility decisions, health, etc.

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• h comes from education, innovation, etc.

• Over 1700-2018, at the global level g =1.6% and n =0.8% • Productivity growth h always slow for countries at world technological frontier • Once global convergence over, h might be low everywhere • Population growth n seems to →0 • So in very long run, maybe n ≈0% and h ≈1-1.5% • Some even less optimistic: long-run g <1%?

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The growth rate of per capita output since the industrial revolution 5.0%

4.5%

4.0% Western Europe 3.5%

3.0% North America

2.5%

2.0%

1.5% Growth rate of per capita GDP perGrowthrateof capita GDP 1.0%

0.5%

0.0% 1700-1820 1820-1870 1870-1913 1913-1950 1950-1970 1970-1990 1990-2012 The growth rate of per capita output surpassed 4% per year in Europe between 1950 and 1970, before returning to American levels. Sources: Piketty (2014) see piketty.pse.ens.fr/capital21c

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The growth rate of world population from Antiquity to 2100

2.0% Observed 1.8% growth rates 1.6%

1.4% UN projections 1.2% (central scenario) 1.0%

0.8%

World population growth rate World 0.6%

0.4%

0.2%

0.0% 0-1000 1000-1500 1500-1700 1700-1820 1820-1913 1913-1950 1950-1970 1970-1990 1990-2012 2012-2030 2030-2050 2050-2070 2070-2100

The growth rate of world population was above 1% per year from 1950 to 2012 and should return toward 0% by the end of the 21st century. Sources: Piketty (2014), see piketty.pse.ens.fr/capital21c. - 22 - Econ 133 - Global Inequality and Growth Gabriel Zucman

The growth rate of world output from Antiquity until 2100

5.0% Projections (central 4.5% scenario)

4.0% Observed growth 3.5% rates

3.0%

2.5%

2.0%

Growth rate of world GDP worldGrowthrateof GDP 1.5%

1.0%

0.5%

0.0% 0-1000 1000-1500 1500-1700 1700-1820 1820-1913 1913-1950 1950-1990 1990-2012 2012-2030 2030-2050 2050-2070 2070-2100

The growth rate of world output surpassed 4% from 1950 to 1990. If the convergence process goes on it will drop below 2% by 2050. Sources: Piketty (2014), see piketty.pse.ens.fr/capital21c. - 23 - Econ 133 - Global Inequality and Growth Gabriel Zucman

References

Beckert, Sven, Empire of Cotton: A Global History, Alfred A. Knopf, 2004. Pomeranz, Kenneth, The Great Divergence: China and Europe in the Making of the Modern , Princeton University Press, 2000. Piketty, Thomas, Li Yang, and Gabriel Zucman, “, Private Property and Rising Inequality in China 1978-2015,” American Economic Review, 2019 (web) Rosenthal, Jean-Laurent and R. Bin Wong, Before and Beyond Divergence: The Politics of Economic Change in China and Europe, Harvard Universtiy Press, 2011. 2018, https://wir2018.wid.world

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